What to Make of Apple’s Plunge

By Jack Hough

Apple’s stock fell for a fifth consecutive day Monday, losing 4% to close at $580 and change. But shareholders shouldn’t lose sleep.

The tech giant has now dropped nearly 9% since April 9, when it closed at an all-time high of over $636. The move far exceeds the 1% decline during the same stretch for the broad Standard & Poor’s 500-stock index.

Analysts blame Apple’s slide on profit taking and earnings-season angst. But the numbers say neither is a good reason to sell.

Consider Apple’s second-fiscal-quarter earnings report on April 24. Wall Street expects it to earn $9.92 per share, down from the $13.87 earned during its first quarter but sharply higher than the $6.40 it earned in the second quarter a year ago, according to FactSet.

“The iPhone has become Apple’s biggest product, and we’re halfway between the iPhone 4s launch and the iPhone 5 launch,” says Michael Walkley, who covers the stock for Canaccord Genuity. “Investors may be selling the stock because they think iPhone sales for the quarter will underwhelm.”

The iPhone 4s launched in the United States in October 2011. Although Apple hasn’t announced its next model, since the original iPhone’s launch in summer 2007, the company has tended to offer new models every year or so.

History doesn’t favor investors who bet on an earnings-day decline for the stock. Over the past five years, the shares have jumped an average of 3.8% on second-quarter earnings reports, according to FactSet data. Apple topped earnings estimates by an average of 21% during that period.

Nor does the stock’s valuation seem to call for profit-taking. Apple’s stock price doubled since September 2010, but its earnings per share also more than doubled since then. Shares look affordable relative to the company’s income and the broader stock market.

Apple sells for 13 times Wall Street’s forecast for its calendar 2012 earnings per share. That’s on par with the price-to-earnings ratio for the S&P 500, of which Apple is the largest member by stock market value.

Apple holds cash and investments equal to nearly one-fifth of its stock market value. In March the company announced it will begin paying a dividend of $2.65 per share, per quarter, later this year. That works out to a 1.8% dividend yield, calculated against Monday’s closing share price–and Apple can afford plenty more (see “Why Apple ‘Record’ Dividend Looks Stingy”).

Mr. Walkley sees the stock’s recent decline as a buying opportunity. If there’s trouble brewing, it’s not reflected in earnings estimates. Forecasts for Apple have moved higher in recent weeks, even though those for the broad market have been falling.

Not all investors will want to use the stock’s decline as a buying opportunity. With Apple making up about 4% of the S&P 500 index, investors who own broadly diversified mutual funds already have plenty of exposure (see “When Will Apple Hit $1,000 a Share?”).

That’s especially true of those who own technology funds. Over the past five days, the S&P 500 tech sector is down 2.5% including Apple, but just 0.6% without it, according to Howard Silverblatt, senior index analyst at S&P.

But for those who’ve coveted even more exposure to Apple than they already have, the past week’s sell-off might be just the opportunity.